From stable to negative: Fitch warns of China’s growing debt

Fitch Ratings has revised China’s outlook to negative from stable, citing increasing fiscal deficits and rising government debt.

As per the announcement, Fitch believes fiscal policy will play a crucial role in bolstering growth in the upcoming years, potentially leading to a “steady upward trend” in debt levels. Additionally, the risk of contingent liabilities could increase as lower nominal growth intensifies the difficulty of managing widespread leverage across the economy.

The Chinese government called Fitch’s decision as regrettable. Fitch’s rating system had failed to reflect the positive impact of China’s fiscal policy on boosting economic growth and stabilising the macroeconomic debt-to-GDP ratio in a forward-looking manner, China’s Ministry of Finance said in a statement.

Fitch Ratings maintained China’s “A+” rating, citing the country’s “large and diversified economy, still solid GDP growth prospects relative to peers, integral role in global goods trade, robust external finances, and reserve currency status of the yuan” as factors supporting the rating.

Chi Lo, Senior Market Strategist at BNP Paribas Asset Management in Hong Kong, said Fitch’s downgrading followed a similar move by Moody’s last December. “These downgrades reflected mostly the current cyclical situation in China, they are not forward looking. This means that, as and when China’s economy improves, they will change their rating outlook to positive.”

“China has a relatively closed capital account, a very small foreign debt and a strong structural reform and debt reduction resolve. So the rise in its fiscal deficit and the high debt load are manageable risks and not a dire situation as many observers see it,” he added.

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China to release key economic indicators next week

Fitch expects China’s economic growth to slow from 5.2% last year to 4.5% in 2024. The Chinese Ministry of Finance reiterated the 5% growth target and said the long-term positive trend of the Chinese economy has not changed, nor has the Chinese government’s ability and determination to maintain a good credit rating.

Economists are now waiting for the key economic data that Beijing will release next week.

“China faces some significant structural headwinds associated with inefficient investment, particularly in the property sector. But policymakers are trying to address this now. So while China’s recent economic performance has been disappointing, it could be on a firmer footing looking ahead,” said Ben Bennett, Head of Investment Strategy at LGIM.

Investment specialists at Franklin Templeton are starting to see signs of growth in China, especially among companies focused on the domestic economy. “China’s policy makers have taken stronger actions to address key issues of the economy. With improving earnings outlook, attractive valuations, and light investor positioning, risk-reward is asymmetric on the upside, in our view,” the April Emerging Markets Insights said.

ING economist for Greater China Lynn Song highlighted that it is important now that China’s fiscal spending is directed toward productive areas of growth for the future. “We expect that a portion of this investment will target strategic industries focused on the development of the green economy and the digital economy,” Song said.